FUND COMMENTARY
04/23/2024
The high interest rate market is a great opportunity for investors to explore short maturity bonds.
Consider a shorter duration asset that doesn’t have the same risk profile as owning something that’s 10 or 30 years long.
With backgrounds on the sell side and strong interests in math, it shouldn’t come as a surprise that both Cortney Swensen and JP Gagne switched to the buy side as fund managers for Thrivent Limited Maturity Bond Fund (THLIX).
“After earning my MBA, I worked on the sell side for a year, and quickly determined that the buy side was a better place for me with my math background in my previous career as an engineer,” said Swensen, who has managed the fund since 2020.
Gagne joined Swensen as a co-manager just a year later. “I've always had a strong math and analytical background, and I always used it in my own personal investing that I wanted to take to the institutional side for other investors,” he said. “I've loved every minute of it, and I've loved every challenge that's come with it.”
Swensen focuses on the corporate credit portion of the Fund. She looks for investment-grade corporates and high-quality, high yield. Gagne focuses on securitized bonds backed by interest-bearing loans like auto loans, student loans and mortgages.
The high interest rate market is a great opportunity for investors to explore short maturity bonds, especially with the expectation that the U.S. Federal Reserve (Fed) may reduce interest rates two to three times in 2024. The Fund offers investors short duration fixed income exposure, making it less sensitive to interest rate changes.
“The demand for short-term investments is driven by the shape of the yield curve right now,” Gagne said. “October 2022 was the first time we saw the yield curve invert during this cycle. What that means is that the two-year yield is higher than the 10-year yield point of the curve. You can now buy a shorter duration asset that doesn't have the same risk profile as owning something that's 10 or 30 years long.
“These aren't normal conditions. We expect the yield curve to normalize at some point, meaning we will again have an upward sloping interest rate curve. But in the meantime, this is a great opportunity to lock in current yields at a much higher rate. Furthermore, if we expect that rates will eventually drop in the future, this will add price return to these short-term investments,” Gagne added.
Quickly rising interest rates of the past two years combined with this year’s anticipation of dropping rates keep Swensen and Gagne active in the Fund.
“As the market and interest rates continue to change, the biggest tool that we have is managing to a duration,” Gagne said. “In 2022 and 2023, when we knew that interest rates were going to continue to go higher as the Fed was hiking, we ran the portfolio shorter than our peers. We had more investments in the 1- to 2-year area and less in the 4- to 5-year area. Now, as the Fed is done hiking, we positioned the portfolio to be more nimble and duration-neutral. Therefore, it gives us the ability to adjust our investments as we see fit and as we get more clarity on what the Fed is going to do.
“I expect interest rates to be a positive influence on the Thrivent Limited Maturity Bond Fund in 2024. Even though we've seen a lot of rhetoric in the market that we're going to have rates higher for longer, we anticipate that at some point the Fed is going to reverse course and begin cutting rates. At that point, as interest rates come down, prices go up. So, in the Thrivent Limited Maturity Bond Fund, not only are you going to earn the current yield, but there's a potential to also have some price appreciation within the portfolio.”
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An inverted yield curve may make shorter-term bonds more attractive than longer-term bonds.
There are many steps Swensen and Gagne take before selecting bonds they want to own in the Fund.
“The strategy of choosing bonds on the corporate side is really a bottoms-up approach that starts with the research teams,” Swensen said. “The research teams are a group of experienced analysts on both the investment grade and the high yield side. Analysts recommend whether to buy or sell individual companies within their sectors. Then we as portfolio managers decide what to invest in across those sectors.”
“When choosing specific bonds in the securitized market, we approach it much like the investment grade side,” Gagne said. “We utilize our research team to underwrite every single deal that we look at and to do the analysis to make sure that we are principally protected, because our No. 1 goal for this portfolio is to get principal back for our investors.”
In addition to monitoring how interest rates affect the Fund, Swensen and Gagne also look closely at risk factors.
“Managing risk is a primary focus of the fund,” Swensen said. “Bonds have an asymmetric risk profile. While principal loss is very rare in the investment grade market, it does occur. So first and foremost, our research teams are monitoring our holdings for new information that might change our opinion of a credit. We as portfolio managers sell any investments in which our core thesis has changed in a significantly negative way.
“Our risk buckets are something we talk about and collaborate on,” Swensen continued. “We ask ourselves, ‘How much risk do we want in the portfolio and what is that risk to be comprised of?’ and ‘Do we want more corporate exposure or more securitized exposure at any one point in time based on our economic outlook or market conditions?’ And also, ‘How much risk-free exposure or Treasuries do we want in the Fund at any given time?’”
“Typically, there is additional spread in the securitized market and that comes from the structural and the prepayment risk that investors take,” added Gagne. “In this portfolio, we try to target AAA rated and the most senior bonds to avoid any extension and default risk.”
Swensen says Thrivent Limited Maturity Bond Fund may be good for investors who are comfortable with some duration risk, but not to the extreme of potential price fluctuations that longer maturity bond funds would have.
“Consistency is paramount for those investing in the Fund,” Gagne said. “We take a lot of pride in historically having a lower-than-average volatility and a higher-than-average return versus our peer group.”
Past performance is not necessarily indicative of future results.
All information and representations herein are as of 04/01/2024, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
U.S. government securities may not be fully guaranteed by the U.S government and issues may not have the funds to meet their payment obligations. The value of U.S. government securities may be affected by changes in credit ratings, which may be negatively impacted by rising national debt. The value of mortgage-related and other asset-backed securities will be influenced by the factors affecting the housing market and the assets underlying such securities. In addition to typical risks associated with fixed income and asset-backed securities, collateralized debt obligations are subject to additional risks. Debt securities are subject to risks such as declining prices during periods of rising interest rates and credit risk, or the risk that an issuer may not pay its debt. The use of futures contracts involves additional risks such as a loss in value in the underlying instrument, which could decrease the Fund’s value. High yield securities are subject to increased credit risk as well as liquidity risk. The Adviser’s assessment of investments may prove incorrect, resulting in losses or poor performance. The Fund’s value is influenced by the performance of the broader market and by factors specific to an issuer within the Fund. When bond inventories are low in relation to the market size, there is the potential for decreased liquidity and increased price volatility. In unusual circumstances, the Fund could experience a loss when selling portfolio securities to meet redemption requests for a variety of reasons. These and other risks are described in the prospectus.
Thrivent Limited Maturity Bond Fund Top 10 Holdings as of 2/29/2024: U.S. Treasury Notes with 01/31/2028 maturity: 5.23%, U.S. Treasury Notes with 10/31/2029 maturity: 0.96%, Avant Credit Card Master Trust with 04/15/2027 maturity: 0.80%, Genesis Sales Finance Master Trust with 12/21/2026 maturity: 0.76%, Ares XL CLO, Ltd. with 01/15/2029 maturity: 0.71, Palmer Square Loan Funding, Ltd. with 07/20/2031 maturity: 0.45%, Wells Fargo & Company with 10/30/2025 maturity: 0.44%. AMSR Trust with 12/17/2038 maturity: 0.43%, Tesla Auto Lease Trust with 09/21/2026 maturity: 0.42% and Tricon Residential Trust with 07/17/2038 maturity: 0.42%.
